Spain Halves Purchase Tax for New Properties

Some seemingly positive news was announced last week for those in the market for a property in Spain. José Blanco, Development Minister for Spain confirmed that with immediate effect the purchase tax (IVA) on the sale of all new Spanish properties will be reduced from 8% to 4%.

In an attempt to breathe some life in to a struggling Spanish property market, the initiative will run until the 31 Dec 2011 and will only apply to the purchase of new build homes signed for at the notary before the deadline date.

Using an example purchase price of €250,000 it will mean the buyer now will have to pay just €10,000 in IVA purchase tax instead of €20,000. The real estate industry in Spain hope that this financial incentive will be enough to tempt the many would be buyers (particularly from overseas) in to the market place. The subject is naturally causing much debate and only time will tell if cutting the purchase tax was a master-stroke or case of too little too late for Spain’s long suffering developers. So, is this really going to make a difference?Just cutting the tax on new home sales so late in the year is really no silver bullet for the Spanish property market, however, it would be surprising if it didn’t motivate a reasonable number of foreign investors to buy now while the opportunity to save 4% on a purchase is there.

The news has generally been well received by the industry and importantly the foreign media. Early indications are that inquiries are up, whether these inquiries manifest themselves in to sales remains to be seen. How will the tax reduction affect the also struggling resale market? If the PR brings more foreigners to Spain to look for a property, then net result should be positive all round including the resale market. Buyers tend to arrive in Spain with a criteria and budget that can be applied to new or resale properties. In the end people will buy what they feel is best for them in their preferred location. In many locations there simply aren’t any new properties for sale and in these areas the resale market can hang on the coat tails of any influx of investors.

Are the government simply trying to shore up the Spanish banks who now own so many of the unsold properties? The tax cut will have a very limited effect for the Spanish banks. For properties they have repossessed from developers there will be little direct benefit as these properties, although new in condition will be treated as resale’s by the notary because the bank became the new owners the moment they swapped the debt for the properties. Resale’s are subject to property transfer tax which for example is 7% in the Valencian community.

The other sad reality is the stock of properties held by the banks is rarely what today’s buyers are looking. In most cases the homes the banks are offering are in poor locations and often in poor condition. There are generally more interesting propositions on in the regular new and resale market.Can Spain afford to cut the tax from 8% to 4% at a time the they need all the tax revenue they can get?It’s a cliché but it is true that 4% of something is better than 8% of nothing.

If a home is sold because of the tax reduction that might not have been anyway then the exercise will have been worthwhile. With every new foreign buyer comes additional money in to the local economy. In addition to money in the tills of the supermarkets, bars, restaurants and travel companies comes local taxes to the town halls and revenue for the utility companies. This is all revenue that would not exist should the new home have remained unsold.

Overall, how effective will the tax cut be? It is fair to say there will be ‘some’ positive effect on the market at what is traditionally the slower part of the year for property sales in Spain. Most will argue that tax cuts should have happened a lot sooner, but any positive action and positive PR will always be welcomed by anyone involved in the Spanish property industry.